Unrepentant Nardelli

GE's golden legacy

IN JUNE last year Home Depot was facing questions from investors about the pay of its chief executive. Robert Nardelli was the only director to turn up at the annual meeting, but refused to discuss his pay. That was remarkably arrogant, considering that Mr Nardelli had been paid something like $125m since landing the top job in 2000 but the share price had fallen by 12%.

This month Mr Nardelli paid for his conduct with his job even though by some measures he had done well at Home Depot. In the year leading up to the furore, the retailer had enjoyed record earnings per share, record gross and operating margins and record sales. Even so, ISS, a consultancy, complained of a “disconnect” between pay and performance. Shareholders seemed to agree: at least 30% of votes at the annual meeting were withheld from ten of the 11 directors on the ticket. As activist investors circled amid continuing criticism of Mr Nardelli's pay, the board decided he had to go—though not without a severance package worth over $200m.

Mr Nardelli's defenestration offers three lessons about pay. First, deals struck in a bull market can look foolish when the bull run stops. Home Depot agreed on Mr Nardelli's contract before the collapse of WorldCom and Enron. Mr Nardelli, a runner-up in the race to lead General Electric (GE), was a catch. But what in 2000 was merely a generous package looked irresponsible in 2006.

Even so, Home Depot might have got away with it had it not made the mistake of treating its shareholders with disdain. After the meeting it was forced to concede that shareholders should have a majority vote on who should be a director.

The third lesson, about Mr Nardelli and GE, puts his salary in a more positive light. One study of the management powerhouse found that the appointment of 20 GE executives as chairmen of other companies between 1989 and 2001 led to an immediate share-price gain averaging $1.1 billion. Mr Nardelli did much better than that, instantly boosting Home Depot's share price by almost $10 billion. Private-equity firms appear to hold GE in similarly high regard. Last summer one of them enticed David Calhoun away from the company to run VNU, a Dutch-based media group with a tenth of the sales of the division he had been running. Reportedly, Mr Calhoun stands to make some $100m from taking it public.